The appropriate taxation treatment of capital gains is one of the most controversial issues in tax policy. Notwithstanding that the debate about capital gains tax (CGT) rate preferences is a politically charged issue, there is an important difference between the findings of relevant empirical research and arguments advanced in the popular debate.
Australia’s first comprehensive CGT provisions, enacted to commence in the 1985-86 tax year, prescribed that net capital gains would be included in assessable income at full marginal tax rates. The 50% CGT discount for individuals commenced in the 1999-2000 tax year on the recommendation of the Ralph Review of Business Taxation (Ralph Review). Because of this tax policy change, only half of most of the net capital gains of individuals are included in assessable income, giving effect to a tax rate preference for capital gains.
It was a prediction of the Ralph Review that the CGT reform package would not lose tax revenue. This was predicated on the assumption that there would be a significant capital gains realisations response which would more than compensate for the static revenue loss from the enactment of the CGT discount.
There was no empirical evidence from Australia to support this prediction of revenue neutrality, given that Australia had not experienced a CGT rate preference between enacting its original CGT provisions in 1985-86, and at the time of the policy change in the 1999-2000 tax year.
In his award-winning PhD thesis, The Implications of Capital Gains Tax Rate Preferences for Personal Taxpayers in Australia, Dr Minas estimated the capital gains realisations response for personal taxpayers in Australia. His estimates imply that the 50% CGT discount for personal taxpayers is likely to have caused a loss of tax revenue. An article based upon the quantitative study in his thesis was recently published in Australian Tax Forum 33(4) (2018), and Dr Minas has presented the research to the Treasury in Australia and at conferences in Europe and North America.
One of the main arguments against CGT rate preferences
is that they are inequitable. This is the case whether they are evaluated from
the perspective of vertical equity or horizontal equity. The rate disparity
between ordinary income and capital gains creates inefficiencies, and it
compromises the integrity of the tax system.
"If lower tax rates are a priority, a better and more equitable way to pursue this goal is to reduce the overall tax rate rather than create two different tax rates for two types of income," says Dr Minas.
The CGT discount has contributed to a de facto scheduler tax system, where the tax rate is dependent on the type of income the taxpayer is in receipt of.
According to Dr Minas there is a tax policy imperative to explore alternative ways of taxing personal capital gains. “The last major tax system review in Australia recognised that the CGT discount should not persist in its current form,” he says.
He sees the enduring contribution of his PhD thesis as “providing the empirical foundations for a better-informed policy discussion in Australia on how to improve the current taxation of personal capital gains.”
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About Dr John Minas
Dr Minas is a Senior Lecturer in the Tasmanian School of Business and Economics at the University of Tasmania and an Adjunct Research Fellow in the Law Futures Centre at Griffith University. Dr Minas' research interests include taxation law, taxation policy and capital gains tax. He commenced his academic career at the University in 2010, prior to joining Griffith University in 2016 and returning to our University in 2019. Dr Minas has published in tax journals including Australian Tax Forum, eJournal of Taxation Research, and the Journal of the Australasian Tax Teachers Association.View Dr John Minas's full researcher profile